tag:blogger.com,1999:blog-2149523431587168680.post5910439251430802775..comments2020-04-01T12:17:36.029-04:00Comments on Oddball Stocks: How an average business can be a great investmentNate Tobikhttp://www.blogger.com/profile/05660387777171986124noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-2149523431587168680.post-77965456751884920172017-10-05T04:30:41.387-04:002017-10-05T04:30:41.387-04:00Thank you so much for the post you do. I like your...<br />Thank you so much for the post you do. I like your post and all you share with us is up to date and quite informative, i would like to bookmark the page so i can come here again to read you, as you have done a wonderful job. <br /><a href="https://eidoo.io" rel="nofollow">easy to use secure wallet</a>Roberthttps://www.blogger.com/profile/12114479635982380752noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-37036402934934476362012-08-22T08:43:58.820-04:002012-08-22T08:43:58.820-04:00Stefan,
Could you show the math on:
An example w...Stefan,<br /><br />Could you show the math on:<br /><br />An example with the 8% ROE company before, that pays no dividends. Assume one buys it at book value and holds it for 100 years. Obviously the annualized return will be 8% per year.<br />Now assume we buy it for half book value and hold it for 100 years. Our annual return will be 8.75%<br /><br />thanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-80251814045817981492012-08-21T14:29:07.803-04:002012-08-21T14:29:07.803-04:00Difference of 75 bps over a 100 years is astronomi...Difference of 75 bps over a 100 years is astronomical. $10k investment grows to $44 million if compounded at 8.75%. Same $10k grows to $22 million at 8%. That 50% discount to book is pretty meaningful in the authors original example.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-46407523939169186852012-08-21T14:27:47.896-04:002012-08-21T14:27:47.896-04:00I completely agree, and looked at the long term fo...I completely agree, and looked at the long term for COR, well as you say it isn't the prettiest thing in the world.. On a normalized basis it probably wasn't as attractive as it appeared when I purchased, but I guess you can say I got lucky.<br /><br />In the case of Hanover the market is almost shut down anyways…shares barely trade! A Hanover type of situation is really ideal, I'd love to have a few companies like this in the portfolio.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-15750317701728837412012-08-21T14:05:57.836-04:002012-08-21T14:05:57.836-04:00I like to keep a watchlist of (normalized) FCF/Pay...I like to keep a watchlist of (normalized) FCF/Payout yields for ROC < 11% businesses so that when I'm interested in one I can compare its yield to similar yielding stocks on the list to make a qualitative decision about which is better/safer.<br /><br />In that vein, in 2010, I remember looking at COR and comparing it to GSOL which is more my kind of business (100% ROIC and growing) which was yielding 38%. I picked GSOL. <br /><br />One of the things that worried me about COR is that its average FCF over a full business cycle is under 3 cents per share (2010 was a very unusual year)which, for a mature, no growth business, is simply not good enough. With Hanover, if the market shut down, one would wait for four or five years to get one's initial investment back; with COR, however, it would be be 40 years (or, more likely, never).<br /><br />That's all a long-winded way of agreeing with you on price being paramount, but emphasizing the caveat that marginal differences in quality matter a whole lot more in the ROIC 6% to 10% range than they do at the ROIC 30% to 35% range.<br />red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-10630113390287072422012-08-21T13:23:22.399-04:002012-08-21T13:23:22.399-04:00A lot is price you pay as well. I like Corticeira...A lot is price you pay as well. I like Corticeira, but I liked it a lot more at my purchase price €.99 or 47% of BV. At the current prices…Hanover is a much better opportunity for sure. <br /><br />Then again COR does somewhat prove this point, the gap between price and BV has closed after the 50% run. When I purchased them they had a FCF yield of 33%, P/B of .47x and a 10% dividend. A 10% ROE wasn't a deal breaker when I was getting that for 50% off. It really hits what this post is all about. I'm hoping Hanover works out the same and runs up 50% on me in a year. Would I buy more COR today at the current price…there are better ideas out there much cheaper.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-62004406346878859692012-08-21T12:59:37.932-04:002012-08-21T12:59:37.932-04:00The worry is that too many investors confuse and g...The worry is that too many investors confuse and good investment like Hanover with a poor investment like Corticeira Amorim. <br /><br />In marginal but stable businesses, it's best to buy the payout yield -- very little can go wrong if an investor buys Hanover at 20% payout yield, for example. <br /><br />For a crappy business like Corticeira, however, one must surely insist on a much higher yield than 20% since it is not paying its way. <br /><br />Book is a red herring for these type of companies: they're not going to liquidate any time soon; they'll keep on keepin' on, whether it makes economic sense or not, esp. if they are family-controlled.red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-71269003351561875082012-08-21T10:36:45.602-04:002012-08-21T10:36:45.602-04:00Weezy Breezy,
Yes, as you and Stefan mention if t...Weezy Breezy,<br /><br />Yes, as you and Stefan mention if the discount is static forever this doesn't work. The whole premise is that eventually the discount is closed and value realized. So that's really step one, figure out if the discount is warranted, if not then this post applies.<br /><br />I should mention I've walked away from a few companies where this technique makes them compelling, but the discount looked appropriate, and there was a structure in place where it was very hard if not impossible to sell the company, and management was resistant to any such move.<br /><br />So after reading these two comments I guess I should have mentioned a few other factors:<br />1) The discount eventually closes<br />2) The size of the discount matters, small discount needs to close quicker than a bigger one<br />3) Dividends<br /><br />In something like Hanover at 35% to book value and paying a dividend I don't care if I have to wait 10 years. At 85% to book without a dividend it's a much different decision, although at that point I'd expect the company to be earning more.<br /><br />As to your last point, I have found that value is usually realized in four to five years. I did some backtesting on net-nets and found even some companies that had were perennial net-nets did grow in share price equal to or at a greater rate than book value growth. So even at the end of a time period if they were still a net-net they'd appreciated along with book value growth. The big catch with value being realized in a few years is sometimes it takes four years to realize the price paid was actually fair value, and the stock wasn't undervalued. There's a company I own that was like that for me. I though (emphasis) I was buying at a discount, well over the years I realized I had actually purchased at fair value, so now I own this company growing at 5% basically doing nothing. I get the full growth in a dividend, but that's about it.<br /><br />NateNate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-77261672508530183392012-08-21T10:21:20.318-04:002012-08-21T10:21:20.318-04:00Nate,
Good article. I think it's worth makin...Nate,<br /><br />Good article. I think it's worth making clear that, in the case of buying an 8% ROE company trading at 50% of book, while earnings yield may be 16%, the market return is only 8% if the discount to book remains unchanged. <br /><br />For example, assuming $100 book value purchased for $50 and the company generates $8 of earnings (all of which is retained in the business). The new book value is $108. Assuming the company continues to trade at 50% of book value, the company's market value is now $54. The investor earned $4 of additional market price on an original purchase price of $50 (8% return).<br /><br />Generating above market returns from businesses compounding book value at market (or below market) rates is contingent upon (1) the size of the discount to book value at which you purchase the business and more importantly (2) the speed with which the market price rises to eliminate the discount. As Stefan noted above, there isn't a huge difference in returns when buying at a 50% discount to book value and buying at book value if it takes 100 years for the market to eliminate the discount.<br /><br />Unless you are a control buyer, you must wait for the market to correct the price in order for you to realize your return. This correction may take a very long time, or never materialize at all. All the while, the investor has capital tied up in a business compounding book value at mediocre or below-market rates. In such a situation, time is not your friend.<br /><br />I don't know if this has been your experience. Perhaps you have seen that the market typically corrects its mistake (on average) within five years or so of purchase. Assuming you can buy a portfolio of businesses for 50% of book, you can expect to double your money in five years from accretion of the book value discount alone. I'd be interested to hear your thoughts on this last point.Weezy Beezyhttps://www.blogger.com/profile/10273216023456953690noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-11963485790705268962012-08-21T08:02:48.399-04:002012-08-21T08:02:48.399-04:00Stefan,
Thanks for the comment. I agree a compan...Stefan,<br /><br />Thanks for the comment. I agree a company earning 15% on book is different than earning 8% at book at a 50% discount mostly because the first company can reinvest at 15% whereas the second one can only reinvest at 8%. As long as the discount persists the math works the same though, as the company returns 8% it is actually a 16% return per year on your investment. <br /><br />A different way to think about this is like a mortgage. If you buy a house for $100,000 and borrow $80,000 with a $20,000 downpayment the math is similar. While the house might appreciate at 3% ($3,000) per year the return on your investment is actually 15% (3,000/20,000). Obviously that ignores borrowing costs, taxes etc, but it's just a simple little example. <br /><br />The key to all of this is that at some point someone is going to pay the fair price for book value. Yes if you invest in a company growing book at 8% and a 50% discount persists for 100 years on paper your investment will work, but it doesn't matter the gain is still 8%. So I guess this whole post is predicated on the fact that at some point value will be realized. I believe value is always realized, but depending on that perspective it could change this post.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-46190185141618900392012-08-21T01:40:31.321-04:002012-08-21T01:40:31.321-04:00Good article Nate! In fact I also like stable, med...Good article Nate! In fact I also like stable, mediocre companies. I would prefer above average companies, but unfortunately it is rare, that someone sells them for giveaway prices ;-)<br /><br />A remark at the 8% ROE company you buy at 50% discount to book value. I'm not sure if you meant it this way, but one should be aware, that you don't get a 16% return on investment in such a situation. It is true, that the earnings yield on your investment is 16% in the beginning. But all that earnings (if no dividends are paid) are reinvested at 8%, which is a big disadvantage over a company with 16% ROE you buy at book value.<br /><br />In fact, if one holds a company for many decades, that completely reinvests its earnings, the annual return of the investor will approximate ROE, regardless of the P/B that was paid in the beginning. (If you buy for a very low P/B it only takes longer, to bring your return near the companies ROE).<br /><br />An example with the 8% ROE company before, that pays no dividends. Assume one buys it at book value and holds it for 100 years. Obviously the annualized return will be 8% per year.<br />Now assume we buy it for half book value and hold it for 100 years. Our annual return will be 8.75%.<br /><br />That is the reason, I like companies to have at least a decent ROE, say 8 or 10%. When they don't achieve this for a long time, I would only consider buying them with a huge discount to NCAV. <br /><br />If you take into account dividends, it changes a bit. It doesn't matter, what the ROE of a company is, if they have constant earnings, pay them as dividend completely and reinvest nothing. As you mentioned in your article, an above average profitable company with no growth prospects is not worth paying a premium price. And vice versa a below average profitable company is not worth a lower earnings multiplier, if it doesn't reinvest a part of its earnings.<br /><br />As no profitable company should be able to reinvest all earnings forever (even Berkshire must stop that, at the latest when they own the whole universe one day), my examples are a bit hyphotetic. But one should be aware, that companies with below average ROE could be a bad investment, if they reinvest a large fraction of earnings.Stefanhttp://simple-value-investing.com/noreply@blogger.com